Looking in todays newspaper, you observe the following yield curve information:

MATURITY YIELD

1 year 1.0%

2 years 1.8

3 years 3.0

4 years 4.2

5 years 5.5

a/ If the pure expectations hypothesis holds, what is the three-year forward rate two years from now?

b/ Is the forward rate you derived consistent with the pure expectation hypothesis? Why?

Please answer both (a) and (b) and show your calculation steps & explanation clearly. Thank you.